su14 ie 343 session 25

8/9/2019 Su14 IE 343 Session 25

1/15

Session 25Income Taxes

7/22/2014 IE 343, Summer 2014, Engineering Economy (Sullivan, 16th)

8/9/2019 Su14 IE 343 Session 25

2/15

Types of Taxes

Income taxes are assessed as a function of gross revenues mallowable expenses.

Property taxes are assessed as a function of the value of proowned.

Sales taxes are assessed on the basis of purchase of goods o

Excise taxes are federal taxes assessed as a function of the scertain goods or services often considered nonnecessities.


8/9/2019 Su14 IE 343 Session 25

3/15

Income Taxes

Up to this point, we have not considered income taxes in oudiscussion of engineering economy.

We will now observe how income taxes affect a projects estcash flows.

Income taxes resulting from the profitable operation of a firm are account in evaluation engineering projects.


8/9/2019 Su14 IE 343 Session 25

4/15

After-tax MARR

Taking taxes into account changes our expectations of returprojects, so our MARR (after-tax) is lower.

Going forward, we will primarily use and be given after-tax Mvalues.


8/9/2019 Su14 IE 343 Session 25

5/15

Taxable Income

Depreciation is not a cash flow, but it affects a corporationsincome, and therefore the taxes a corporation pays.

Taxable Income = gross income

all expenses except capital investments depreciation deductions


8/9/2019 Su14 IE 343 Session 25

6/15

Taxable Income (example)


8/9/2019 Su14 IE 343 Session 25

7/15

Taxable Income (example)


8/9/2019 Su14 IE 343 Session 25

8/15

Federal vs. State Tax


Federal taxes are calculated using a set of income brackets, applying a different tax rate on the marginal value of income

State taxes vary widely, but usually are in the range of 6 12

8/9/2019 Su14 IE 343 Session 25

9/15

Federal Tax Rates


8/9/2019 Su14 IE 343 Session 25

10/15

Income Taxes (example)


8/9/2019 Su14 IE 343 Session 25

11/15

Income Taxes (example)


8/9/2019 Su14 IE 343 Session 25

12/15

Effective Tax Rate

Corporations need to know their effective tax rate, which is combination of federal and state taxes according to either fobelow.


8/9/2019 Su14 IE 343 Session 25

13/15

Effective Tax Rate (example)

Find the taxable income of a corporation given the informatIf you assume a state tax of 9%, what is the effective tax rate

Gross income = $5,270,000

Expenses (excluding capital) = $2,927,500

Depreciation deductions = $1,874,300


8/9/2019 Su14 IE 343 Session 25

14/15

Effective Tax Rate (example)

Taxable Income = $468,200

Effective tax rate = .34 + (1 .34)(.09) = 40%


8/9/2019 Su14 IE 343 Session 25

15/15

Gain (Loss) on Disposal of an Asset

When a depreciable asset is sold, it is rare that the market vbook value are equal.

When the sale results in a gain, it is referred to as depreciation rec

When the sale results in a loss, it is referred to ascapital gain.


[ ]=

su14 ie 343 session 25

Documents